Durham’s Digitalsmiths to be acquired for $135 million

The digital video recording technology company TiVo Inc. has struck a deal to buy Durham-based Digitalsmiths for $135 million in cash, the California-based company announced Wednesday.

Based at downtown Durham’s American Tobacco campus, Digitalsmiths provides search and recommendation software that can be used to find movies, shows and other video content on TV set-top boxes, mobile devices and other hardware.

The company employs 49 full-time workers and 12-part-time people – the majority of whom are based in Durham. Following the acquisition, the company is expected to keep its presence in Durham, spokeswoman Betsy Carr said in an email.

However, the specifics of what the deal will mean for individual employees are being worked out, she said. Matt Berry, Digitalsmiths’ co-founder, chief operating officer and chief technology officer, said officials are talking about plans to grow the company’s local footprint.

“I think TiVo is looking at this as an opportunity to grow within this region,” Berry said in an interview Wednesday. “We’ve been able to kind of execute in an extremely competitive space, and it’s largely due to the talent that we have here at Digitalsmiths.”

Berry said Digitalsmiths had multiple acquisition offers, but they chose TiVo because they felt the company had the “best match” in terms its strategic plan and employee culture.

For TiVo, the acquisition was seen as a “significant expansion in market opportunity,” according to the company’s announcement.It is meant to speed the company’s evolution to a device and independent cloud-based software-as-a-service company.

Digitalsmiths’ main product is software called “Seamless Discovery” that allows users to search, get personalized recommendations, and see social trends of video content on TV set-top boxes, mobile devices, tablets, smartphones, computers and gaming consoles. The software is cloud-based, meaning it’s accessed by consumers over the Internet.

Berry said that TiVo has some services that overlap “a little bit” with Digitalsmiths’, but the Durham company’s approach has been different and adds value to their offerings. He also said part of the deal is about the company’s market penetration.

Digitalsmiths has relationships with seven of the top 10 U.S. pay-TV operators such as Time WarnerCable, and DISH, that together serve 64 percent of U.S. households that pay for TV service, according to the announcement.

Its user base represents only about 10 percent of the total potential base licensed under its current contracts. TiVo expects its active user base to grow to more than 50 percent penetration in the next few years.

The company has seen “rapid” revenue growth since it launched Seamless Discovery in 2012, according to the announcement.

“The Digitalsmiths acquisition opens new opportunities to commercialize and deploy TiVo's cloud-based services and technologies to operators, in an extremely cost-effective way that can be offered either independently or in conjunction with TiVo's renowned user interface,” Tom Rogers, CEO and president of TiVo, said in the announcement.

TiVo first introduced its DVR technology in 1999, allowing viewers to fast-forward through advertisements. It provides its technology through set-top boxes, through software build into other companies’ hardware, and through consumer devices such as tablets.

In the company’s annual report for the fiscal year that ended in January 2013, the company described continued changes in the way people consume video content. The report pointed to the emergence of Video on Demand, which gives consumers a greater range of choices for what and when they watch.

The changes also require a “solution to suggest, search, navigate and access the volume of broadcast, cable and Video on Demand content from Internet and cable providers.”

The report also pointed to tablets and entertainment-oriented smartphones as new video consumption devices.

The company said it planned to continue to invest to keep customers and attract new ones, highlighting the launch of products and applications for Android-and-iOS-enabled smartphones and tablets that allow users to control their set-top boxes and to watch video in and out of their homes.

The acquisition is expected to close in the first quarter of TiVo’s fiscal 2015. In the third quarter of 2013, the company reported net income of $12.5 million, which was down from about $59 million in the same period in the prior year.

The quarter in the prior year was impacted by one-time litigation proceeds of $78.4 million from an intellectual property settlement from Verizon. Its total revenues were up about 43 percent, however, to $117 million. The company’s stock price was trading up about 1.56 percent to $12.38 Wednesday afternoon.